Banking

Hedge funds sue to block Ambac transfers

AlistairBarr

SAN FRANCISCO (MarketWatch) -- A group of hedge funds, including credit giant King Street Capital, have sued Ambac Financial Group Inc. to try to stop transfers from its main bond-insurance unit to the holding company.

The funds, which also include Aurelius Capital Management, Fir Tree, Monarch Alternative Capital and Stonehill Capital Management, said they own more than $1 billion of residential mortgage-backed securities and other debt insured by Ambac Assurance Corp., or AAC, Ambac's
ABK, -0.63%
main insurance subsidiary.

The policyholders are trying to make sure Ambac Financial Group, the holding company, doesn't siphon off money and other valuable assets from AAC. They want all assets to go toward paying policyholders, including them.

Ambac Financial Group warned recently that it may file for bankruptcy protection from creditors. The company suffered massive losses after insuring mortgage-related securities that turned toxic during the financial crisis.

Wisconsin's Office of the Commissioner of Insurance, the main regulator of AAC, seized part of the insurer's business earlier this year to protect municipal bond investors. Policyholders who bought protection from AAC on more complex mortgage-related structured products were moved to a segregated account overseen by the regulator.

"In the rehabilitation of the segregated account of Ambac Assurance Corp and related matters, the first priority of the Office of the Commissioner of Insurance is to protect all policyholders," the regulator said in a statement Tuesday. "OCI remains focused on its duty under Wisconsin insurance law to implement a durable solution that serves the interests of all policyholders, as well as the general public."

However, it's not clear what value may be gained from owning Ambac's holding company. The company has said in regulatory filings that it can't get dividends from its insurance subsidiaries. Without such payments, the holding company may have little value.

"As is, assuming no acceleration of its obligations, Ambac Financial Group can probably make payments for the next year but will be pressed thereafter," said Egan-Jones Ratings, a rating agency that's paid by investors rather than issuers.

Still, King Street Capital and the other Ambac policyholders claimed in their suit that they've tried to get a commitment from AAC and Ambac Financial Group that nothing of value will be transferred to the holding company "without fair consideration."

"AAC and AFG have refused to make such a commitment," the policyholders said in a statement late Monday.

Instead, AAC has "insisted on preserving its ability to make dividend payments and to otherwise transfer substantial value to AFG for no consideration," the policyholders added.

Under the terms of a June settlement, AAC can transfer to Ambac Financial Group up to $59.5 million a year to cover the holding company's operating and debt-service expenses, the policyholders noted.

Ambac Financial Group is also allowed to use AAC's net operating loss tax carryforward to offset some types of income without compensating AAC for that. This asset could "easily" be worth more than $1 billion, the policyholders said.

Ambac shares rose 4.5% to 54 cents on Tuesday.

Meanwhile, Dow Jones Newswires reported that Harrisburg, Pa., will skip a $3.29 million payment on its general obligation refunding bonds, series D and F of 1997. The debt payment, due Sept. 15, is insured by AAC.

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